Copper is a Dead Cat

Intermediate
  • At the start of the year the outlook for copper was constructive
  • That soon fizzled out as Trump trade tirade grew louder
  • A corrective channel started in June, it has crashed through key averages
  • Despite the potential of a small uptick, it will be a dead cat bounce

Copper for July delivery ended at $2.751/lb, up 2.06% for the day, trimming its losses for the week to 0.87%.

So, the metal staged a small bounce back after they reached their lowest levels in a year on Thursday as concerns that a global trade war mounted. An escalation could strain global supply chains and slow down the global economy.

The metal’s futures for September delivery traded as low as $2.6735/lb, their lowest since July 14, 2017, when it hit $2.663/lb.

Copper represents a most interest tussle of the real world and technical evaluation. As this year began, the indicators for copper were looking good:

January 1st:                 Spot 3.29         50DMA 3.12 (0.17 < Spot)       200DMA 2.87 (0.46 < Spot)

July 20th:                      Spot 2.75         50DMA 3.01 (0.26 > Spot)       200DMA 3.00 (0.25 > Spot)

However, as Trump has turned up the trade rhetoric in a most indelicate manner, so the sentiment has turned sour.

The first chart presented looks at the 12-Month view following spot and the crucial 50 and 200 day moving averages. Next to that are presented the current technical sentiments.

Copper 12-Mth 23-07-18

Source: www.investing.com , Spotlight Ideas

The chart shows that at the start of June 2018 the price began to collapse and soon crashed through the 50 and 200-day moving averages in a sharp and severe corrective.

Now, that on its own would not offer any reason to buy and yet the short-term technicals indicate that the market is in the mood to buy the red industrial metal.

To answer this apparent paradox, it is useful to use another technical tool. Therefore, in the next chart one can see the same 12-Month copper prices matched with its 20-day moving average and the upper and lower Bollinger Bands.

Copper 12-Mth Bollinger 23-07-18

Source: www.investing.com , Spotlight Ideas

What can be clearly seen is that copper spot has been hugging the lower boundary since the start of July. One can see that during the past 12-months every time the spot has touched the lower boundary there has been a bounce higher, but not this time.

That said, it is hard to overlook the time based technical sentiment that is calling copper a “BUY” or a “STRONG BUY”. Therefore, there may be a very short-term bounce trade to have, but it is hard to see any level more that $2.80/lb.

The red industrial metal is sometimes called, “Dr Copper,” and it is seen as a leading indicator of future economic trends since it is used in several different sectors.  Whilst the trade war temperature keeps rising, it looks as though the good Doctor will deliver nothing more than a “dead cat bounce”.

Macroeconomic Strategist

Stephen Pope is the Managing Partner of Spotlight Group. He has worked in the world of finance since 1982 and has performed d...continued

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